6 of the Best Financing Options for Franchising a Business

We know that owning a franchise can be an exciting endeavor because of the massive income opportunity that it provides. However, it comes with a caveat considering the amount of money required to invest in a franchise start-up. On average, you need to spend thousands of dollars so you can start a franchise business. Most top franchises require substantial net worth or assets, but it is also possible to finance a franchise. This article provides you with six franchise business loans to explore.

Six Best Financing Options

1. Commercial Bank Loans

This type of financing allows you to take out a loan from a bank. When talking about loan financing, the first thing that comes to mind is a term loan, especially if you have applied for a home mortgage or a student loan. With this model, the bank or lender will offer you a lump sum of cash that you need to repay in installments over a specific period of time. The amount you need to repay should include the interest.

When you consider a commercial bank loan for purchasing a franchise, you need to keep your personal credit history and business plan available because the lender will use them as the basis for approving your application. These documents also help a lender evaluate your creditworthiness.

This process allows lenders to determine if you can afford to repay the loan that you are requesting. The higher your credit score and the stronger your financial history, the better your payment terms and interest rates will be.

2. Franchisor financing

Another way that you can finance a franchise is by considering invoice financing companies. When choosing this option, you need to talk directly with your franchisor so you can explore the franchise business models with tailored solutions based on your needs. These financing solutions are specifically designed for franchisees either through a lender or partnership. The corporation will provide you with capital directly. Some common examples of franchise businesses that offer this option include UPS Store, Meineke, and Gold's Gym.

With franchisor financing, you get everything you need under one roof. Since most of these programs provide you financing not only for franchise fees but also for purchasing equipment and other essential resources for starting up your business.

When it comes to searching for funding, a franchisor will give you the best options suitable to your needs. They will also give the pros and cons of each financing option you consider.

3. SBA loans

For aspiring franchisees, SBA loans are considered one of the most desirable options because it is supported by the U.S. Small Business Administration. It obtains its funding from intermediary lending partners.

This type of loan follows the same model found in traditional term loans offered by lenders or banks. The only difference is that SBA guarantees a portion of the amount of what you borrowed by reducing the interest rates and providing longer repayment terms.

SBA loan is deemed as a desirable type of financing option because once you have a good credit score and have demonstrated your ability to repay the amount you borrowed, you will be able to apply for this type of loan. Since SBA loans have better offers than standard loans, expect qualification standards to be stringent. The application process is also longer compared to traditional loans.

4. Alternative lenders

You can also fund your franchise quickly from alternative lenders. These lenders have shorter application processes and less stringent requirements. They also have a variety of loans to offer such as business lines of credit, term loans, and equipment financing. However, you should keep in mind that this option is more expensive and has shorter repayment terms.

This financing option is helpful if you wish to supplement your current financing or you have not met the qualification requirements set forth by your bank. It is also a viable option if you are in need of quick cash.

5. Crowdfunding

If all else fails, crowdfunding is the best way to go but this option requires creativity. You will need a personal page for this option to work. You will also need to target a specific organization. Crowdfunding can be considered if you do not have a good credit score or you are not satisfied with the type of loans for which you qualify.

6. Home Equity Loan For Business

This option is also referred to as a second mortgage. You can obtain an additional loan using your home's equity as collateral. You will not qualify for this loan if you do not have equity in your home. The money you obtain from this type of loan can be used for funding your business, especially for large purchases such as buying new equipment, commercial property, or facility upgrades.

Once you have decided which financing that suits your business, the next step to take is to complete an application. After which, the lender will review your qualifications and assess your creditworthiness. While in most cases you will be required to present your business credit history only, there are lenders that will also ask you for your personal credit history.

Factors That Influence The Evaluation Process

Financial Information

Before you consider applying for a business loan, you have to make sure that you have organized financial paperwork because lenders will use this information to find out about your finances. Lenders are often checking your bank statements, balance sheet, income statements, business, and personal tax returns, business debt schedule, and much more.

Personal Credit History

Another factor that will play a vital role in approving your application is your credit score because it serves as an indication of how reliable you are in repaying your debts. If you are responsible for repaying your personal debts, you are most likely respond by paying your business debts as well. Check your credit score before you apply for a franchise loan. This way, you will have an idea of where it stands and whether or not you qualify for such options.

Business Plan

A business plan is required if you are applying for financing because it explains the type of franchise you want to work with and how you are planning to work with them. Through your business plan, you will also give lenders an idea of how you are going to use your money to grow or start your business. Most lenders approve franchise businesses with long track records of success and personal branding.

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